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UK City law firm bonuses

Following the UK’s April 2010/11 financial year end, UK headquartered law firms are finalising and paying bonuses to their associates as is the annual tradition. Historically, law firms, unlike investment banks, have paid their lawyers relatively modest bonuses. Whilst a 12-15% bonus would not have been untypical for a mid-level associate in a magic circle law firm, this would have been dwarfed by a typical 40-60% bonus paid by a bulge bracket investment bank to an equivalent level lawyer.

There is a natural assumption that the proportion of bonus payments is directly proportional to the financial performance of law firms. Whilst this argument appears to hold true for law firms based in the US (see market update on US bonuses), it appears not to be the case for UK law firms. Indeed, in spite of financial year 2009/10 being considered poor, with revenue and profit for most firms falling, according to PricewaterhouseCoopers (PwC) annual law firms’ survey 2010, bonus payments, as a percentage of associate salaries, actually went up significantly.

The report states:

“ Firms continued to pay bonuses in 2010 and at a higher percentages of salary than in 2009 (which in turn were higher than 2008), using bonuses as a method of rewarding staff without increasing base salaries and giving greater flexibility to the management on staff costs”

So this seeming paradox is explained in the context of generally lower salaries (or smaller increases in base salaries) being paid to associates who have been rewarded instead through higher bonus payments (see below).

Historic background

Over the past 10 years law firm bonus payments have become much more prevalent at UK headquartered law firms and have generally moved away from the fixed (and modest) percentage payments to all assistants based on the performance of the firm as a whole. Increasingly firms use bonus payments to differentially reward lawyers in areas in demand on the basis of an individual’s exceptional performance or chargeable hours. Often a combination of all the above is used.

By 2007 law firm bonus payments were becoming an emotive issue with some firms combining high headline bonus payments with complex deferral payments opening up these firms to accusations from associates of “smoke and mirror” implementation. Once UK City firm even announced an hours based bonus payment of up to 75% which was interpreted by many associates (and parts of the legal press) as a prelude to setting 2,500 annual chargeable hours targets.

Post-Lehman the basis upon which bonus payments are paid continues to vary but there appears to be a move away from deferred payments and very high headline figures.

The value of bonus payments

Although bonus payments have become an aspect of associate compensation for many lawyers in City law firms it is noteworthy that they are very rarely cited to us as recruiters as a significant factor in either recruitment or retention. This is because of the uncertainty inherent in both the payments themselves and the amount paid (a factor significantly mitigated in US based law firms where bonuses are automatically set by class year). As a rule of thumb law firm lawyers nearly always prefer a fixed base salary over a potential uplift even where this can be several times greater. It is also interesting to note that in recent times investment banks, those trend setters of high bonus payments for lawyers, have generally significantly decreased their bonus payments as a percentage of salary.

Amount of bonus payments

Top 10 firms

The PwC law firms’ survey 2010 states that Top 10 firms paid bonuses to:

75% of lawyers with 5+ years post qualification experience (“pqe”);

65% of lawyers with 3-5 pqe;

The report does not state the proportion of lawyers below 3 pqe who were paid bonuses.

The report does not state the proportion of lawyers below 3 pqe who were paid bonuses.

Where bonuses are paid they were on average:

Financial Year End

2010

2009

5+ pqe

9%

8.8%

3-5 pqe

10.3%

7.2%

1-2 pqe

8.7%

6.6%

NQ

5.7%

5.6%

Top 26-50 firms

The report does not state the proportion of lawyers at these firms who were paid a bonus but it states that where bonuses are paid they were on average:

Financial Year End

2010

2009

5+ pqe

7.7%

7.8%

3-5 pqe

6.6%

7.5%

1-2 pqe

7%

7.2%

NQ

5.3%

5.9%

So, in this group at least, bonus payments as percentage of salary fell. This was not the case for firms in the top 51-100

Top 51-100 firms

The report does not state the proportion of lawyers at these firms who were paid a bonus but it states that where bonuses are paid they were on average:

Financial Year End

2010

2009

5+ pqe

11.6%

5.4%

3-5 pqe

7.8%

4.1%

1-2 pqe

8.6%

4.9%

NQ

0.8%

3.8%

In relation to the above the report does NOT state the proportion of lawyers below 2 pqe who received a bonus (only the amount).

Predictions going forward

In the US, law firms, which traditionally announce annual bonus payments in December/January, froze bonus payments for the second year in a row (and they remain significantly down from 2008). However, for the first time in years 2011 saw a number of US law firms (including some in the UK) paying “spring bonuses”. This presents a confusing picture.

It is to be remembered that the PwC report only applies to UK headquartered law firms (i.e. the Legal Business 100). Because the report is historic (and reflects financial year ending April 2010) we think that the bonus payments were disproportionally high as they would have been based on a percentage of base salaries for the financial year 2009/10 (when most firms froze salaries and did not matriculate lawyers up the pqe lockstep). In effect where high bonus payments were made, they were made as a reward in lieu of any increase in base salary. Because the financial year 2010/11 saw a return to normality, with the unfreezing of salary bands and an unfreezing of lockstep, the special circumstances which lead to higher bonus payments for some associates no longer exist. For this reason we think that, where bonuses are paid in 2011, a more likely percentage of base salary will be closer to the 2009 figures (above) than the high figures paid out in 2010.